Saturday, 31 May 2008

MYSTERY OR CAPITAL OR MYSTERY OF POLITICAL AWARENESS

The MaidRecently I read an article in the TIME magazine about the state of the American economy and a section on the crisis in the housing market struck me as strange. The author wrote that the benefits from tax deductions on home-mortgages accrued to the wealthiest 16% of taxpayers. Instead, those tax benefits could have been given to expenditure that might have delivered higher economic growth. "A factory, a software program…". In short, anything but a house, for "a house just sits there". And this was what was strange- to say that a house just sits.

It reminded me of one of my conversations with my maid. She had mentioned that she had a small house in Calcutta. On enquiring if she gets some rental income from it, I was told that she never gives her house on rent since it was too risky. In Delhi, she continued, there are rental agreements and they are binding (I didn't want to tell her of the rental scams that I'd heard of). Moreover, even if we had rental agreements there, the tenants don't leave when asked to. Instead they demand money for vacating and even get support from the local politicians. It's probably the strata of society she lives and moves in, pardon me for sounding so bourgeois, but you'll agree this section of uneducated are less aware of their rights and do not qualify for being a part of one or the other social movements that work for the rights and entitlements of the less fortunate and deserving.

Anyhow, the conversation, in turn reminded me of a chapter from a book titled The Mystery of Capital: Why Capitalism Triumphs in the West and Fails EverywhereElse by Hernando de Soto . The book seeks to explain why developed countries have been able to grow rich while developing countries have not - an age-old question asked by the Physiocrats, Adam Smith in The Wealth of Nations and then by Karl Marx, among others. The answer, according to de Soto lies in making capital productive. If property rights are well-defined, then assets can be converted to capital, thereby increasing productivity. The difference lay not in the types of goods each was endowed with but that these physical goods lived the same lives everywhere but in the West they lead a parallel life. They could be used as collateral to get loans that can be used to engaged in production and generate income.

According to de Soto, "...most of the poor already possess the assets they need to make a success of capitalism. Even in the poorest countries, the poor save. … But they hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment." He continues, "…dead capital exists because we have forgotten (or perhaps never realized) that converting a physical asset to generate capital—using your house to borrow money to finance an enterprise, for example—requires a very complex process. It is not unlike the process that Albert Einstein taught us whereby a single brick can be made to release a huge amount of energy in the form of an atomic explosion. By analogy, capital is the result of discovering and unleashing potential energy from the trillions of bricks that the poor have accumulated in their buildings."

I remember thinking at the time of my conversation with my maid if only our property rights (PRs) were better defined (characterised by ownership, exclusion and transferability). This is not to say that we don't have PRs but they aren't well defined. In other words, an economic good would have the attributes of rights to use, rights to exclude others from using, and the right to transfer the good to another AND their enforcement. If only we had better land titles, a well-functioning rental market, free access to the credit market, better enforcement agencies, better… if only. Is that, then, the difference between developed and developing countries? The fact that the former are able to assign economic and social values to goods while the latter cannot get beyond the natural/ physical values of the same goods? Or is it that they have better legal institutions that will uphold these values and integrating them within one system rather than several unconnected and uncoordinated schemes? That they have corruption free law agencies that will uphold the rights of their citizens? That would only establish the neo-classical economics propounded in textbooks! Not the capitalism that exists in the West today.

In my opinion, there is a thin line between the two extremes of laissez faire and communism and it is that which differentiates developed from the developing. Developed countries, too were feudal and monarchic; In fact, de Soto maintains that the past of the Western countries is the present of the developing ones. Yet with the move to democracy they were able to remain centralised enough for governments to know that they can only uphold the rights of the citizens. Yet they are decentralised enough to realise that they are only the caretakers- not the endowers. Our country follows neither a communist nor laissez faire model; we have confused the two and failed to move coherently through the spectrum (communism-socialism-capitalism-laissez faire).

India, not unlike many other developing countries, didn't really move away from a feudal society. There always seems to be someone in a position of the "endowers". Local goons, politicians, bureaucrats, the lot of them- all of them project the image that were it not for them we would not get water, electricity, etc. People have the right to own economic goods (for example, houses) yet they are not able to exclude others from expropriating benefits from the same. It seems to me that there is "they" - some who believe, and are treated such, that they have the power to endow as they please. And we all know it takes two to tango so there is the "we", as a collective, who chooses to remain in the complacent position of takers? We got our Independence but we never really regained our freedom. We need to be more proactive and participative. We need to ingrain in ourselves the fact that each of us has certain rights and it is up to us to uphold them without causing another to forego. From among the five mysteries that de Soto lists, one would conclude that India is shrouded not so much in a Mystery of Capital as much as a Mystery of Political Awareness.